Closures among Russia’s small and medium-sized enterprises accelerated in the first quarter of 2026, after the economy contracted in the first quarter of this year in real terms and economic pressure on small companies mounts.

Russian Forbes reported that about 209,000 SMEs ceased operations during the first three months of the year, up almost 9% from the same period in 2025. Retail businesses, beauty salons and restaurants were among the sectors most affected, according to the publication.

Economists and business groups cited elevated interest rates (currently at 14.5%), falling purchasing power, increased competition and the recent two-percentage point hike in VAT as the main drivers behind the rise in closures. At the same time unemployment has not changed and has actually fallen 10bp to 2.1%, a modern historical low.

The increase in business failures comes as Russia’s economy shows widening divergence between sectors supported by state spending and those dependent on consumer demand. Defence manufacturing and industries linked to wartime production have benefited from heavy government expenditure, while many service-sector businesses have struggled with labour shortages, rising wage costs and softer household spending.

Russian consumers have also faced persistent inflation in food and basic goods, which is running well ahead of the official rate of 5.9% in April. Inflation is hitting the poorest part of the population the hardest where food in particular makes up the largest part of the average shopping basket. That has eroded disposable which rose ot a record high in 2023 and 2024, creating a new War middle class and a consumer boom. Restaurant operators and retailers have warned in recent months that demand has become increasingly uneven outside major cities such as Moscow and St Petersburg, which remain largely inured to the economic problems.

Russian disposable incomes have risen unevenly since 2023, supported initially by strong wage growth driven by labour shortages and increased state spending linked to the defence sector. Official data showed real disposable incomes returning to growth after the contraction that followed the 2022 invasion of Ukraine, with salaries rising fastest in manufacturing, construction and military-related industries. However, economists said much of the increase had been offset by persistent inflation more recently. Regional disparities have also widened, with workers in sectors tied to state contracts benefiting more than employees in retail and services. Against that the military wages and sign-up bonus paid by the state to fill the Armed Forces of Russia (AFR) ranks have benefited Russia’s poorest regions the most, offsetting some of the fall in real incomes.  

Smaller businesses are particularly vulnerable because they lack the financial reserves and state backing available to larger companies. Borrowing has also become prohibitively expensive for small companies. Tax adjustments introduced at the start of 2026, including changes affecting simplified taxation schemes used by many SMEs, have added to pressure on operating margins.

The Russian government has repeatedly described the SME sector as a strategic priority for economic diversification and employment growth. However, business associations have argued that tighter credit conditions and rising administrative costs are making it harder for entrepreneurs to remain profitable.

The central bank has said inflation risks remain elevated and has signalled that borrowing costs are likely to stay high until price pressures ease more sustainably.